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Demirgüç-Kunt: Development Research Group, The World Bank. Detragiache and Gupta: Research Department, International Monetary Fund. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the World Bank, the IMF, their Executive Directors, or the countries they represent. The paper has benefited from very helpful comments from Jerry Caprio, Stijn Claessens, Paolo Mauro, Miguel Savastano, Peter Wickham, and participants to the joint Bank-Fund seminar. We wish to thank Carlos Arteta and Anqing Shi for excellent research assistance.
Among the first studies are Demirgüç-Kunt and Detragiache (1998) and Eichengreen and Rose (1998); among the second, Hardy and Pazarbašioğlu (1999), Kaminsky and Reinhart (1999) and Demirgüç-Kunt and Detragiache (2000).
For theoretical models of bank runs see, among others, Diamond and Dybvig (1983), Chari and Jagannathan (1988), and Allen and Gale (1998). For a review of the literature, see Bhattacharya and Thakor (1988).
Bernanke (1983) argued that the contraction in credit brought about by the banking crisis was instrumental in the propagation of the Great Depression in the United States. Recent attempts to test for a credit crunch effect in East Asia include Ding, Domaç, and Ferri (1998), Ghosh and Ghosh (1999), and Borensztein and Lee (2000).
Aggregate deposits did not decline during the recent Asian crises, while depositors switched from small to large banks and from domestic to foreign banks (Domaç and Ferri (1999), and Lindgren et al. (1999)). The Asian crises are not included in our macro sample.
The exchange rate depreciation also results in a sharp and persistent increase in bank foreign liabilities as a share of assets, of the order of over 20 percentage points.
The central bank may play an active role in providing liquidity to the system by injecting liquidity in some banks and withdrawing it from others.
Kharas and Mishra (2000) find that large off-budget liabilities in developing countries are attributable to realized contingent liabilities following financial crises.
The episodes for which both foreign currency credit and deposit data are available are: Argentina (1995), Bolivia (1995), Chile (1980), Ecuador (1995), Finland (1991), Indonesia (1992), India (1991), Israel (1983), Italy (1990), Japan (1992), Panama (1988), Papua New Guinea (1989), Paraguay (1995), Peru (1993), Sweden (1990), United States (1981), Uruguay (1981), Venezuela (1993). In addition, information on deposits only is available for Thailand (1983), Nigeria (1991), Portugal (1986), El Salvador (1989), and Turkey (1991), and for credit only for Mexico (1982) and Norway (1987).
Gupta, Mishra, and Sahay (2000) find also currency crises to be more recessionary in more developed countries.
Demirgüç-Kunt and Detragiache (1999) find that explicit deposit insurance makes banking crisis more likely, suggesting that a formal guarantee does play an important role.
Of course, we are not controlling for the severity of the shocks that cause the initial output decline. In countries without deposit insurance output may recover faster because the initial shock was small, as without deposit insurance even small shocks could give rise to depositor panics. However, Demirgüç-Kunt and Detragiache (1999) find that, for given level of macroeconomic shocks, countries without deposit insurance are less likely to experience crises.
The definition of a currency crisis follows Milesi-Ferretti and Razin (1998). The occurrence of “twin crises” has received much attention in the recent literature (Kaminsky and Reinhart (1999), Goldfaijn and Valdes (1998)).
We include banks from Malaysia though we have data only through the first aftermath year (1998), because coverage for this country is quite good and the Asian episodes are of particular interest. Excluding Malaysia does not significantly alter the picture.
Excluding outliers should alleviate the impact of unidentified mergers or acquisitions on variables such as credit and deposits growth.
If outliers are included in the sample the loan loss variables lose significance.
If outliers are included deposit growth is not significantly different from the precrisis period.
Beginning in the second quarter of 1996 Mexican banks used positive deposit inflows to purchase government securities (and to increase provisioning), Luzio-Antezana (1999). Argentine banks increased their investment in government securities after the 1995 crisis over and above what was mandated by increased liquidity requirements, Catao (1997). Domaç and Ferri (1999) document a similar phenomenon in Korea, Malaysia, and the Philippines in 1998. In the Thai crisis, large banks benefiting from deposit flight from small banks increased liquidity instead of expanding their loan portfolio, Ito and Pereira da Silva (1999).
The portfolio shift away from lending is more marked in countries with deposit insurance, and so is the decline in overhead costs.
Mishkin (1996) views panics as an important mechanism through which banking crises propagate to the real sector.
For a discussion of policies followed to support credit in the recent Asian crisis, see Lindgren et al. (1999).
IFS stands for International Financial Statistics, published by the IMF. WEO stands for the World Economic Outlook database of the IMF.